There are pros and cons to both options, but it's important that you realise there is no one answer to this question. In the end, the answer depends on your specific situation.
It’s a common debate: should you pay off your mortgage as quickly as possible, or invest the money instead?
Disclaimer: There are pros and cons to both options, but in the end, the answer depends on your specific situation.
Here is a look at some of the factors you need to consider when making this decision.
- Mortgage interest rates
- The stock market
- Leverage
- Tax implications
Mortgage Interest Rates
Long-term mortgage rates are one of the most important factors to consider when deciding between paying off your mortgage and investing because they can have a huge impact on how much money you save or earn.
Popular wisdom says if mortgage rates are low, you may be able to pay off your loan quickly and save interest payments in the long run. Low mortgage rates can mean that the amount of money you pay each month on your mortgage is reduced, which can free up extra cash for paying down the principal balance of your loan.
However, this also means that the ‘Return on Investment’ you receive is lower.
Why would you pay off something that costs you only 3 to 5% a year when you can invest that same money in a managed fund which promises you 8-9% a year? It seems like a simple equation. However, that is further complicated when we look at historical mortgage rates. Just because mortgage rates are low or high at a certain point in time does not mean they will always remain that way.
Paying off your mortgage when the rates are low, might mean you pay less interest when mortgage rates rise. So what really needs to be compared is the difference between medium to long-term interest rates versus the belong term return of the market.
But wait there is more…
The Stock market
The stock market plays a key role when deciding between paying off a mortgage and investing. As an option for the money that someone would otherwise put towards their mortgage, the stock market can provide an opportunity to make money with their excess funds. Investing in stocks, bonds, mutual funds, or other securities can generate returns that exceed the rate of return on their mortgage debt. However, it does come with additional risk and volatility versus your mortgage.
Also, a period of higher interest rates normally coincides with a weaker stock market. This means at precisely the time your mortgage rates are at the highest may be the best time to invest in the stock market.
Leverage
The reason why Kiwis have done so well with property investment (including their own homes) is leverage. By paying down your mortgage, you are reducing the leverage of your home investment. That means any gain in house prices is less valuable in terms of ‘Return on Investment’ to you, the more you have paid down your mortgage.
However, leverage also comes with risk. If for whatever reason you cannot afford to pay down your large leveraged to the hilt mortgage, it could add a lot of stress to your life. Worst-case scenario, you could be forced to sell your home at lower-than-expected prices and lose money.
Tax Implications
Tax implications are another factor when deciding between paying off a mortgage and investing.
When it comes to tax advantages, paying down your mortgage could provide more benefits than investing in the stock market. The amount of money you save in interest by paying down your mortgage is not taxed, while a portion of the gains you make while investing is.
Advisers View
When deciding between paying off a mortgage and investing, it is important to consider the current interest rates, market conditions, and tax implications. Mortgage interest rates are key in determining whether to pay off the loan quickly or invest the money instead. Low-interest rates could make it a smart choice to pay off the loan quickly and save on interest payments.
“When it comes to deciding between paying off your mortgage and investing, it’s important to weigh all of your options carefully,” said Clive Fernandes, Director of National Capital – a money advice firm. “On one hand, you may be able to pay off your loan quickly and save on interest payments in the long run, but there is also potential for higher returns in the stock market, especially during times that the market is at a current low.”
The emotional reasons (video)
Conclusion
I’m sorry for wasting your time, but it’s important that you realise there is no one answer to this question. The reality is that it totally depends on your own personal situation, and your attitude to life, money and risk!
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